October 26, 2010
Professor John C. Coates published “Corporate Governance and Corporate Political Activity: What Effect Will Citizens United Have on Shareholder Wealth?” in September, as part of the HLS Working Paper series.
In his article, Coates focuses on the relationship between corporate governance and corporate political activity. In Citizens United, the Supreme Court relaxed the constraints on corporations to spend money on elections, rejecting a shareholder-protection rationale for restrictions on spending. Coates, wanting to predict the effect of Citizens United on shareholder wealth, analyzes both the governance and the performance of corporations with different levels of political activity in the S&P 500.
According to Coates, demonstrated observable political activity (e.g., campaign donations, lobbying) was negatively correlated with shareholder-friendly governance. He also confirms that shareholder-friendly governance is "strongly correlated" with firm value. Coates uses different measures of corporate governance, including two indices of "shareholder friendliness" developed by (among others) Harvard Business School Professor Paul Gompers and Harvard Law Professor Lucian Bebchuk, which are in turn based on corporate governance provisions tracked by RiskMetrics Group Inc. He also looks at other governance measures, such as ownership dispersion.
Coates concludes that “in the period 1998-2004 shareholder-friendly governance was consistently and strongly negatively related to observable political activity before and after controlling for established correlates of that activity, even in a firm fixed effects model. Political activity, in turn, is strongly negatively correlated with firm value.” These findings, he observes, “imply that laws that replace the shareholder protections removed by Citizens United would be valuable to shareholders.”
Coates’ paper, “Corporate Governance and Corporate Political Activity: What Effect Will Citizens United Have on Shareholder Wealth?," can be found here.
Coates, who joined the HLS faculty in 1998, has been the John F. Cogan, Jr. Professor of Law and Economics at HLS since 2006. He has published extensively on corporate governance and mergers and acquisitions, as well as other areas of corporate law. His research interests also include financial institutions, securities, and the legal profession.
- Greg DiBella